December 5, 2023
Cenovus Energy Inc.
Digging into Thermals with Jason Abbate
Our view: Our recent update with Jason Abbate reinforced our confidence that Cenovus is best-in-breed when it comes to in-situ thermal operations. Our constructive stance towards Cenovus reflects its capable leadership team, strengthened balance sheet, stern capital discipline and bolstered shareholder returns. We are maintaining an Outperform recommendation on Cenovus and one-year target price of $32 per share.
Key points:
2024 Outlook. Although it’s generally well understood that Cenovus’ production profile in 2024 will remain largely stable year/year, its multitude of organic growth opportunities should begin to surface in 2025. We peg Cenovus’ 2024 production outlook at about 782,000 boe/d (vs. Bloomberg consensus of 800,800 boe/d) in the context of a $4.75 billion (vs. consensus of $4.71 billion) capital program. The company plans to release its 2024 guidance on December 14.
Digging into Thermals. At Foster Creek, Cenovus plans to boost its capacity by over 30,000 bbl/d in the 2027 timeframe with brownfield opportunities. Cenovus is in the midst of a multi-year investment at Christina Lake to boost its bitumen production starting in the second-half of 2025 and contributing 20,000-30,000 bbl/d of annualized volumes in 2026 and beyond through the Narrows Lake tie-back project. Cenovus envisions that Christina Lake could support approximately 260,000 bbl/d of bitumen production in 2026 (about 235,000 bbl/d currently). At Sunrise, the company plans to potentially achieve 70,000 bbl/d by 2027.
Planned Maintenance. Both Foster Creek and Christina Lake are split into two major facility groups, with each group undergoing a major planned turnaround once every five years. Cenovus staggers these major turnarounds every 2-3 years so as to minimize lost production during the outage period. Christina Lake will undergo a major turnaround in 2024, with around 120,000 bbl/d taken offline for the duration of the turnaround.
Free Cash Flow. We peg Cenovus’ free cash flow at $5.0 billion in 2023 under our base outlook and $4.6 billion under futures in the context of a $4.25 billion capital program. Looking ahead into 2024, we peg Cenovus’ free cash flow at $7.7 billion under our base outlook and $5.4 billion under futures pricing in the context of a $4.75 billion capital program.
Relative valuation—discount vs. global peer group. Under futures pricing, Cenovus is trading at a debt-adjusted cash flow multiple of 4.7x in 2023E (vs. our global major peer group avg. of 5.5x) and 4.1x in 2024E (vs. peers at 5.5x), and free cash flow yields of 12% in 2023E (vs. peers at 10%) and 13% in 2024E (vs. peers at 10%). We think Cenovus should trade at an average/ above average multiple vis-a-vis our global peer group, reflective of its capable leadership team, strengthened balance sheet, rising shareholder returns on the horizon, and improving downstream performance